Trust issues
Estate planning is no one’s favorite topic to discuss around the dinner table — or any table for that matter. In fact, according to Greg Jones of The Trust Co., 60 to 70 percent of Americans die without any sort of documents willing down their property. Although it’s important that any individual makes sure his or her assets are secured and beneficiaries are taken care of before he or she kicks the proverbial bucket, it’s especially important that business owners, who have partners and employees depending on them, make plans for the future of their business.
The basics
Herb Willbrand of Brown, Willbrand, Simon, Powell and Lewis P.C has been practicing law in Missouri since 1959. In those years he has seen several changes in estate planning trends. “We never really used a trust for all practical purposes until 1970,” he says. “Everyone used wills, and trusts didn’t become popular until 1980. But now, about 85 percent of the estate work I do utilizes a trust, not a will.” The general public’s reservation with using a will for estate planning seems to lie in probate court, where a judge signs off on the provisions of the will because to do that the estate is required to pay court fees, and the process, according to Jones, can take between six to nine months.
In recent years, trusts, or more specifically revocable trusts, have become a popular way for individuals to manage their assets. “People will create a trust because it becomes a separate entity other than yourself, so if I create the Gregory Jones trust, I transfer all my property to the trust while I am alive, and the trust becomes the owner,” Jones says. Revocable trusts have become common in this type of estate planning because there is a virtually unlimited amount of provisions an individual can add and change to the trust while alive, meaning your 14-year old daughter won’t suddenly be left with infinite funds for Justin Bieber concerts.
Although Willbrand says the idea of retitling property out of an individual’s name into the name of the trust can sometimes be off-putting to clients, he’s generally able to assure them that the retitling of entities is not as overbearing of a process as it may seem.
“A trust is really about being able to control your assets from the grave, where as with a will, those assets get paid out to beneficiaries immediately, and there is no more control over it,” says Polly Reynolds, vice president of The Trust Co.
Getting down to business
When individuals first go into business together, it’s likely they aren’t necessarily thinking about what will happen to that business if they become disabled or die, but Jones, Reynolds and Willbrand say that’s exactly what they should be thinking. Willbrand says the first thing he does for his clients is to make sure that the business is titled as a legal entity as opposed to being owned by an individual, either in the form of a limited liability company, a corporation or a limited partnership.
Part of this process of incorporation is setting up a buy/sell agreement and an operating agreement. Unlike an operating agreement, law does not require a buy/sell agreement; however, Reynolds says it is essential in securing the future of the business in case of death or disability. She explains that “buy/sell agreements are between partners or owners of a company, so if one partner dies, it would give the remaining partner, or partners, the opportunity to buy out the deceased’s share of the business.”
An essential part of this buy/sell agreement is keyman, or keyperson, life insurance, insurance that is taken out on members of the business who are essential to its operation, usually owners or majority shareholders. This insurance makes it possible for remaining partners to buy out the shares of the business from the deceased even if they don’t have the capital to do so on their own.
Finally, as individuals, business partners can title their shares of their freshly incorporated business under the title of their trusts. “A revocable trust provides all the provisions for where money is going to go in the case of death, and it also provides for what will happen to the shares of the business listed under the trust,” Willbrand says.
From beyond the grave
Even if you’ve owned your business for 15 years and have never considered a course of action in the case of an untimely death within the business, it’s not too late to make sure those assets are secured. First, update the terms of the operating agreement, and draft a buy/sell agreement if you don’t already have one to include any new business partners, shareholders or properties owned by the company. Double check that there are no restrictions in the operating agreement prohibiting you from transferring your shares of the company into the name of your trust. If there are restrictions, get approval from your business partners so you can transfer the title of your shares.
Second, choose a reliable trustee. “Being very careful about who you choose as your successor trustee, the person who manages your trust after you are no longer able to,” Jones says. “That’s a really important decision,” Jones says.
With trusts that include a lot of business assets in particular, it’s very common to hire a corporate trustee. “A lot of times we recommend using a corporate trustee because we’re neutral people,” Reynolds says. “Siblings, family members and business partners can get mad at us all day long, but at the end of the day, we’ll go away, and the nucleus of the family will still be together.” Furthermore, a corporate trustee has the ability to hire a temporary consultant to manage assets that the trustee may not be knowledgeable about, such as the operations of a very specific type of company. No matter whom you choose as your trustee, both Reynolds and Jones emphasize the importance of taking time with the decision and not just naming the first relative who comes to mind.
Finally, you should ensure that all business assets are actually listed in the name of the trust. “When you first go to see your attorney, if you have a trust, double check that the certificates or documents that you have on the ownership of your business are titled under the name of the trust and not the owner’s name as an individual,” Reynolds says, adding that there always needs to be underlying documentation, either through an operating agreement or some other official document, that proves that business assets are included in the terms of the trust.
Although it’s never fun devoting so much time and effort to what will happen after you die, a strong estate plan can save your family and business associates months, if not years, of headaches deciding what to do with your hard-earned money. Taking the time to get your affairs in order can be the turning point in setting up your family and your business for success in the future. Talking to an attorney, making a plan and revising that plan through life’s twists and turns will ensure you a carefree passage into the great beyond — or will at least ensure that your conniving son-in-law doesn’t inherit all your property.